After having believed that the diplomatic negotiations were working and that the troops were withdrawing, at the beginning of the week we saw the beginning of an all-out Russian offensive into Ukrainian territory which, at the time of writing, was on the verge of losing control of its capital, Kiev. To be honest, I have little idea how far this could escalate, the real reasons for the conflict (the real ones, not the declared ones) and what an eventual outcome could look like. I leave that to people who know better, especially those who have a different historical understanding of conflicts than we have in the West. But that does not mean that we cannot, knowing what we know so far, configure some changes in the macroeconomic environment for the short and medium term with respect to the base scenario for 2022.

First, it is key to consider this episode as a supply shock. This is vital when projecting possible stabilization moves by, for example, Central Banks. Secondly, far from helping to solve some of the main problems arising from the pandemic, this situation would only make them worse: supply chains, pressures on food prices, rising energy prices, etc. Thirdly, increased volatility has impacted and will continue to impact the markets, which could be more complex for the already complicated emerging markets.

Without wishing to minimize the drama that any war provokes in people (which is this economist's number one concern), I believe that this invasion makes the decisions that monetary policy makers should take over the coming months even more difficult. On the one hand, they will now have more reason to raise rates, in a clearly more inflationary context, but on the other hand, the effects on activity (clearer in Europe, less so in the US) could delay the long-awaited normalization. Unfortunately, the extent of the conflict, the sanctions applied and the ability to substitute some of Russia's exports, will be vital to know how long this pause in the rate adjustment process should be.

At the local level, the greatest risk is related to the persistence of oil above US$100 (or even more), but also to food prices that could continue to rise. Some of this could be offset by increases in the price of copper and other commodities that we export, but the balance is leaning towards the negative. However, and going back to what I mentioned at the beginning of the second paragraph, there is little the Central Bank can do in the face of a pure supply shock. If we think about additional increases in the TPM to those already projected, I think they should only be considered in the case of more persistent de-anchoring of inflation expectations and not in CPI data that could be higher than estimated, especially if they come from fuel or food.

It is time to be cautious and not make hasty decisions, which does not mean being passive. Let us hope that diplomacy and negotiations will prevail again and that this invasion will have a limited duration. From the end of the world, for now, we have to be spectators.

Nathan Pincheira 

Chief Economist of Fynsa